December 23, 2007

The NYT doesn't get it on trade

The New York Times bemoans the lack of support that the existing trade regime gets from the field of Democratic presidential candidates:

Many Americans are experiencing economic anxiety. Wages for most
workers are going nowhere. It is a sad fact that despite enormous gains
in productivity over the past few decades, the wages of typical workers
are only marginally higher than they were a quarter of a century ago.
But throttling trade — say, by reconsidering existing agreements —
would hurt a lot more people than it helped. There is scant evidence
that trade has played a big role in holding down typical workers’
wages. There is abundant evidence that it has contributed substantially
to America’s overall economic growth. It offers American producers
access to foreign markets. It multiplies choices for producers and
consumers. Foreign competition spurs productivity growth at home.

Trade,
like technological change, can produce wrenching dislocations that hurt
some workers. But trade barriers are not the proper tool to deal with
these changes. What is needed is a bold strategy to rebuild a
functioning safety net, deploying some of the vast wealth this nation
has gained through globalization to assist those hurt by the forces of
economic change. This will allow Americans to embrace globalization,
rather than fear it.

Here's what's wrong with this argument:

1. It automatically equates any desire to reconsider trade agreements and take a breather on new agreements as "protectionist."

2. It fails to recognize the ways in which technology and globalization interact to contribute to unequalizing trends in incomes, taking refuge in the defensive statement that "There is scant evidence
that trade has played a big role in holding down typical workers’
wages."

3. It follows up this statement with "There is abundant evidence that it has contributed substantially
to America’s overall economic growth," ignoring what every student of trade learns, which is that large gains from trade are possible only of there are also large amounts of income redistribution.

4. In portraying the conflict as purely one over incomes, it overlooks what is the greatest strain in the present regime of globalization--namely, the incompatibility between the scope of markets (straining to become global) and the scope of regulatory institutions (still national).

5. And as a consequence, rather than accept the need to rethink the existing rules of the game, the editorial takes refuge in the same stale recommendations that every trade liberalizer has been offering for the last quarter century at least--more safety nets, better training, and more progressive income taxation.

I do think those items in the NYT's policy agenda have an important place on the policy agenda. My earlier book Has Globalization Gone Too Far? was largely about the need for a serious social-insurance complement to the trade agenda. But it is also time to recognize that the WTO rules need to become much more flexible to provide a better balance between international trade and domestic regulatory and other policy priorities--in other words, to assure domestic electorates that their values and preferences are not being sacrificed to the demands of some globalization agenda constructed, in any case, by a narrow elite.

UPDATE: Although much more restrained, Paul Krugman too has worries that his editors may not have gotten things quite right. But his doubts seem to be based on the much greater share of imports coming from developing countries in GDP, compared to a couple of decades ago. I never quite understood why these volume indicators are important in a world where prices and competition get determined at the margin. But I look forward to Paul's new paper and to see where he ends up.

Comments

"It multiplies choices for producers and consumers." New York Times

I wonder if even this is true. As international corporations find competitive advantage in economies of scale, choices are diminished not increased. Smaller companies find it that much harder to compete and products become more uniform. Less competition allows quality assurances to slacken. Other choices are harder to find.

Even when economies of scale haven't reached the tipping point of crowding out competition, trade with other countries doesn't necessarily mean greater choice.

For instance, I don't want to eat any fish raised in China. However if selling farm raised fish from China offers my local grocery store higher profit margins or greater sales, chances are fish from China will crowd out other products on my supermarket shelf, at least for a time until consumers learn about the quality of the Chinese product and new fish farms can be started in countries with better quality control and cleaner waters. Higher prices for these fish will price some consumers out of the market until competition and increased production brings prices down to where some consumers can start adding fish to their grocery list again.

I'm not entirely sure what vast array of consumer choices I have that I didn't have before.

Last time I was back in Maryland, I noticed that the mid-range places I used to shop to get good clothes had pretty much evaporated - replaced either with expensive places that sell crappy clothes or cheap places that sell crappy clothes.

And have you tried to buy a pack of gum that didn't contain artificial sweeteners, lately? Even the ones that aren't sugarless contain them these days.

There's a lot of stuff, but then there always was. But when it comes to the everyday things I use every damned day, I'm finding my choices are often more limited - good stuff disappears, and I have to settle for other stuff.

Since the FDA doesn't actually check most of the products coming in from other countries at the heart of all my choices especially food products is the question, "Should I take a chance or not?"

I don't think that is one of the greater choices the NYT is touting, yet there it is.

And going back to my farm raised fish example, since our government still hasn't gotten around to implementing the law that the origination of food products has to be marked I can't be sure that any fish I buy didn't come from China. Without that assurance I just won't buy fish. Now I have no choices unless place of origin is stamped on the package. How has that increased my choices.

Even well known brand names which I trusted years ago now have to give me assurances before I'll buy.

When I go out to eat, I'm not going to ask the chef where the fish I'm being served comes from. Even if I would ask I have no reason to trust restaurants I don't know. Therefore, fish is a less likely choice from the menu no matter how may choices they are offering me.

There is nothing wrong with NYT’s story except that they don’t get it all. And though I agree with Dani on the obvious issue that the national regulatory frameworks have not been able to keep up with globalizations, I have a feeling he does not get the full story either…because we have also expanded our needs of regulation.

The problem is that parallel to globalization there has been a tremendous rent capturing agenda going on simultaneously. The main pillars of that agenda are the award of ever more intellectual property rights, the ever growing importance of global brands, and the financial engineering that by squeezing values to the last drop at all time (each quarter) keeps the voice of capital so much louder than the voice of labor. This lean rent capturing machine has hindered the full benefits of globalization to flow back to the consumers and so if, we do not get a grip on it, the sheer volume of redistribution needed becomes just too much for anyone to handle.

When we award an intellectual property-right we are creating a monopoly and we are committing to invest societal resources to defend it…but we impose no limits on how that monopoly is to be used and that simply seems not right.

By the way I would love to ask wjd123 who he trusts the most to do the right for him. His local restaurant picking out the fish he can safely eat or the credit rating agencies picking out his safe bets?

By the way I would love to ask wjd123 who he trusts the most to do the right for him. His local restaurant picking out the fish he can safely eat or the credit rating agencies picking out his safe bets?--Per Kurowski

Per Kurowski,

If I have to pick between the two, I would say credit rating agencies. But that is only because it's easier for me to see how tainted their picks are and ignore them. I also can't get murcury poisoning from a bad investment pick.

Both food safety and credit rating agencies need international regulations.

In the case of our credit rating agencies the EU is already asking for a seat at the tables of our rating agencies since EU citizens and financial institutions buy our fiancial products. That I take is a start to internationalism when it comes to regulations.

As for international regulations when it comes to food safety things don't look as promising.

I believe my increased well being will come from greater assurances that violators of international standards will get caught, and not the severity of the punishment they receive. As a deterrent I prefer sureness of punishment to severity of punishment. China can pass all the laws it wants and execute all the violators it wants, but I'll still believe that its laws and the executions are for show.

I'd prefer that there were international agencies with investigative powers and the ability to impose sanctions doing the checking and rechecking on food for export.

Since the Bush Administration has gutted our FDA, I might add the United States to any list of countries that deserves greater international scrutiny of food exports.

Such internationalism puts a check on national folly and expands all of our rights. Isn't that an internationalism that not only helps protect our rights but expands them? Isn't that the type of internationalism we want?

wjd123 says “In the case of our credit rating agencies the EU is already asking for a seat at the tables of our rating agencies since EU citizens and financial institutions buy our fiancial products. That I take is a start to internationalism when it comes to regulations.”

You see even though I agree with all you said about the need for a new and enhanced internationalism, this particular part makes me shiver since it will only mean digging us even deeper in that hole of systemic risk creations that the use of credit rating agencies signifies.

Please repeat with me a 1000 times… “The subprime mess would have remained a minor local minor mess and would never have been able to go global, had it not been for the credit rating agencies blessing securities backed by subprimely awarded mortgages to the subprime clients”.

Now, who appointed the credit rating agencies to act as the financial overseers or commissars? The bank regulators! Shall we then have to sue Grenspan and his fellow regulators?

"...every student of trade learns...that large gains from trade are possible only of there are also large amounts of income redistribution."

Hmmm, the last time that I checked my Trade 101 textbook, it said no such thing. It said that free trade leads to an increase in overall welfare--there is no judgement about whether that welfare accrues to a few or many. That said, income redistribution may be required to ensure that the welfare gains are shared more widely and/or to mitigate the losses f certain segments of the economy. Both of which may be important to ensure against a backlash, which is what we see from the likes of Lou Dobbs.

The regulatory issue is another point altogether that can and should be addressed by trade negotiators, but that is not necessarily the motivator behind Democrats' anti-trade stance. It is the same old labor union-style arguments. If the Democrats (or anybody for that matter) would speak more frankly about the costs AND benefits of trade, then perhaps we could more practically address the real issues rather than railing against trade just for the sake of it.

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